This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more.

Latest Stories

Latest Stories

Auditing

Related

TOPICS

Uncategorized Article

Panel Finds Audits Are Sound, But Need Improvement

In May, after 18 months of study, a panel
appointed by the Public Oversight Board to examine the
effectiveness of independent audits released a draft
statement of its findings. Representatives of the SEC, the
AICPA and several audit firms testified at hearings in June
regarding the panel’s report and recommendations.

Formed in 1998 at the request of SEC Chairman Arthur
Levitt, the POB’s Panel on Audit Effectiveness studied the
audit process and the effect of recent auditing trends on
the public interest. It found that the auditing profession
and the quality of its work were fundamentally sound.

Nevertheless, regulators, audit clients and investors
have voiced concerns that auditors have not been dealing
effectively with “illegitimate earnings management” and
other forms of fraudulent financial reporting. In its
report, the panel made the following recommendations, among
others, to improve audit quality and help auditors perform
at consistently high levels:

To increase
their chances of detecting instances of material
financial statement fraud, auditors should use forensic
accounting methods on every audit they perform.

The AICPA Auditing Standards Board (ASB) should make
auditing and quality control standards more specific and
definitive.

In certain areas, firms should review and strengthen
their audit methodologies, guidance and training
materials. Peer reviewers then should report how those
materials are being used during audit engagements.

Audit firms, through their communications,
performance evaluations, training, compensation and
promotion policies, should reinforce to their employees
the importance of conducting high-quality audits.

The POB, the AICPA, the SEC practice section (SECPS)
and the SEC should agree on a new charter for the
POB—one that would give it the authority and
independence to oversee standard setting for auditing,
independence and quality control, as well as monitoring,
discipline and special reviews.

A majority of the members of the Independence
Standards Board (ISB) should be from outside the
profession, and the SEC should support it in its
mission.

The SECPS should strengthen the peer review process,
including requiring annual reviews of the largest firms,
which perform most independent audits. The POB should
also increase its oversight of those reviews.

The SECPS should strengthen its disciplinary
process.

Audit committees should preapprove nonaudit services
that exceed a threshold amount and, in the process,
consider certain factors, which the ISB should identify.

The International Federation of Accountants should
establish an international self-regulatory system for
the auditing profession.

At the
hearings, SEC Chairman Levitt expressed support for the
proposed new POB charter. He urged the firms and the AICPA
to immediately endorse it and warned that if they didn’t
join in giving the POB the additional authority it needs to
oversee the audit process, the alternative would be a
“legislative solution.”

In his testimony, AICPA
President and CEO Barry C. Melancon said the AICPA too is in
favor of a strong POB. “To the extent those words support
independence and oversight, not management,” he said, “I
don’t think we’re going to have any problems.” He added that
“the ISB is the body that should issue independence
standards for auditors of publicly held companies.”

Melancon also stressed the importance of allowing audit
firms to meet the needs of the “new economy” by providing
nonaudit services, which he said could have a positive
influence on the effectiveness of audits and attract more
students and qualified specialists to the profession.
Further, he warned that overreliance on specific standards
could lead to an homogenization of the audit and recommended
that firms be allowed to “differentiate themselves according
to their specialties, strengths and competencies.” This will
maintain the value of audits, he said, and help prevent them
from becoming a commodity.